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Edited Transcript of NATR earnings conference call or presentation 7-Nov-19 10:00pm GMT

Q3 2019 Natures Sunshine Products Inc Earnings Call

Provo Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Natures Sunshine Products Inc earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Joseph W. Baty

Nature's Sunshine Products, Inc. - CFO & Executive VP of Finance

* Nathan G. Brower

Nature's Sunshine Products, Inc. - Executive VP, General Counsel & Secretary

* Terrence O. Moorehead

Nature's Sunshine Products, Inc. - President, CEO & Director


Conference Call Participants


* Jurriaan Hofman

Robeco Institutional Asset Management B.V. - Equity Analyst

* Steven L. Martin

Slater Capital Management, L.L.C. - Manager




Operator [1]


Greetings, and welcome to the Nature's Sunshine Products Third Quarter 2019 Conference Call. (Operator Instructions) This conference is being recorded. I'd now like to turn the conference over to your host, Mr. Nate Brower, General Counsel of Nature's Sunshine Products. Thank you, Mr. Brower. You now have the floor.


Nathan G. Brower, Nature's Sunshine Products, Inc. - Executive VP, General Counsel & Secretary [2]


Good afternoon. Thanks to all of you for joining our conference call to discuss our third quarter 2019 financial results. This call is available for replay in a live webcast that will be posted on our website at naturessunshine.com in the Investors section. The information on this call may contain forward-looking statements. These statements are often characterized by terminology such as believe, hope, may, anticipate, expect, will and other similar expressions.

Forward-looking statements are not guarantees of future performance, and the actual results may be materially different from the results implied by the forward-looking statements.

Factors that could cause results to differ materially from those implied herein include, but are not limited to, both factors disclosed in the company's annual report on Form 10-K under the caption Risk Factors and other reports filed with the Securities and Exchange Commission.

The information on this call speaks only as of today's date, and the company disclaims any duty to update the information provided herein.

I will now turn the call over to Terrence Moorehead, Chief Executive Officer of Nature's Sunshine Products.


Terrence O. Moorehead, Nature's Sunshine Products, Inc. - President, CEO & Director [3]


Thank you, Nate, and good afternoon, everyone, and thank you for joining us for today's call. I'm pleased to be with you today to discuss our third quarter results and some of the progress that we've made transforming our business.

With me today is our Chief Financial Officer, Joe Baty, who will walk you through our financials in greater detail, but I'm going to kick things off today with a brief overview of the business.

Now as you know, earlier this year, we launched a new global strategy designed to strengthen our business by improving our consumer appeal and dramatically improving profitability.

We're only about 7 months into the process, but so far, I'm very pleased with our progress through the third quarter.

Already, we're seeing significant improvement to our margins, which were up 300 basis points versus Q3 prior year, excluding nonrecurring items, while net income was up 60% versus Q3 prior year. Our efforts to restructure the business, including the new leadership structure we launched in July and a leaner, more efficient organization, has helped drive profitability while strengthening our ability to focus and more effectively execute our strategies.

Our new operating business units, or as we call them, OBUs, are more focused on addressing local consumer needs, improving market effectiveness and building the capabilities needed to drive results. During the third quarter, we made significant progress against each of our 5 global strategies, and I'd like to briefly discuss our progress on each one of those.

Our first strategy that we call brand power is about creating a more aspirational brand that excites, inspires and transforms the way people think and feel about our company.

During the third quarter, we completed Phase 1 of our global rebranding initiative, which includes the introduction of new logos, fonts, packaging, messaging and brand imagery.

We're finalizing our Phase 2 launch plans, but as we move forward, we anticipate updating all of our consumer and sales-facing assets with our exciting new branding that repositions our company to celebrate our leadership and heritage in the herbal supplements industry.

We also announced our entry into the rapidly growing hemp-derived CBD market. The CBD market in the U.S. is estimated by some analysts to deliver upwards of 50% annual growth in the market, exceeding $20 billion within the next 5 years. Unlike any other CBD product on the market, our research and development team have developed a series of proprietary whole spectrum CBD oils that deliver targeted levels of bio cannabinoids to trigger specific cannabinoid receptors in the body. Our scientists have also leveraged the company's industry-leading expertise in herbal supplements to integrate unique and proprietary combinations of natural herbs, phytonutrients and herbal essential oils to optimize our products' performance. This one-of-a-kind hybrid approach results in a more targeted and effective CBD product that naturally helps keep the endocannabinoid system in balance. And simply put, that just means that the body can perform at its optimal level.

We're excited to be entering the CBD market with a unique line of products that will take CBD to the next level. Our emphasis on traceability and improved sourcing will allow Nature's Sunshine to deliver active compounds that offer better performance, quality and transparency more -- of more than any other company in the market, while improving the overall consumer experience.

As part of our launch strategy, we've developed a new brand which will be distributed across multiple channels to maximize consumer access.

Our second strategy, field energy is about reimagining the Nature's Sunshine experience. Our initial starting point focuses on strengthening field fundamentals and making it easier to do business with us, but we also want to improve consumer access by being more omnipresent.

To that end, during the third quarter, we opened a new state-of-the-art branch and distribution center in South Korea that improves workflows, leverages new technology and dramatically improves the sales experience for new and experienced distributors.

It's a dramatic transformation, it really is, that raises our visibility and stature in the market. We're also testing a new retail concept in South Korea with our first-ever flagship store to improve brand awareness access and further enhance the consumer experience.

We continue to focus on this important strategy with significant projects underway in North America and Europe, specifically designed to modernize and improve how consumers and distributors do business with Nature's Sunshine.

Our third strategy called digital first is about developing a next-generation digital platform. In the third quarter, we launched a new web-based order management system for the new South Korean branch experience that I just shared with you, and we've also created a new mobile app for all of our global Synergy distributors.

The new app will be launched shortly. In North America, the team has finalized Phase 1 plans for a new website that offers improved functionality, new features, a more friendly user experience, more powerful search capabilities and a new design based on our global rebranding.

Additional functionality and features will be introduced in the future as we move away from just managing transactions to managing life cycle relationships based on consumers' evolving needs.

This really is a key strategy for our company, and we plan to continue making strategic investments in our website, digital marketing and data analytics.

Our fourth strategy called manufacturing inc. focuses on expanding our award-winning supply chain capabilities. During the third quarter, we made significant progress building new capabilities by securing our USDA Organic Certification and by receiving ISO 9001 quality certification. These are both landmark accomplishments that further distinguish Nature's Sunshine from our peers. When combined with our existing list of certifications that include NSF, TGA, Kosher and Halal certifications, the addition of USDA Organic Certification and ISO 9001 places Nature's Sunshine an exclusive company. We believe this level of excellence offers significant competitive advantage in a market where consumers and distributors are increasingly demanding more reliable quality, performance and transparency.

Nature Sunshine stands head and shoulders above the crowd.

Our fifth and final strategy called the right stuff is the foundation for developing high-performance teams. The results of these efforts are evident in our continued margin and net income growth. The launch of our new operating business units, which have been organized by region, is already producing results. We have become more nimble, responsive and closer to the consumer, which allows us to more effectively drive performance. For example, our increased regional focus has allowed us to maintain positive growth in China, accelerate performance in Europe and increase our focus on building meaningful plans to stabilize our business in North America and Latin America.

Again, we're still in the early stages of rolling out our strategies, but we continue to believe that we have considerable opportunity to drive growth and profitability.

Now let me turn to the third quarter operating highlights. During the quarter, we generated just over 1% growth in local currency net sales on a consolidated basis driven primarily by growth in Europe and Asia with relatively constant net sales in Latin America while North America continued to experience modest declines.

In Europe, we generated 14% local currency growth, driven by strong performance in Russia, reflecting the continued momentum of our local market initiatives over the past couple of years.

In Asia, net sales increased 2% as we generated double-digit growth in Japan and China. These gains offset a decline in South Korea, which remains strong, but we lapped last year's sales acceleration in the third quarter.

Having said that, we're particularly pleased with our ability to hold our year-over-year sales levels in China given the external market forces that have negatively impacted the industry.

During the fourth quarter, we will anniversary a significant acceleration in China during last year's fourth quarter, and as such, will not -- will likely not produce year-over-year growth in China. However, we remain focused on maintaining a stable level of quarterly net sales and remain confident in our long-term growth opportunity in China. Net sales in Latin America were essentially constant with the prior year on a local currency basis, while North American sales continued to see modest declines.

Net sales in North America declined 4% year-over-year during the third quarter. We will begin to implement several initiatives to drive growth in the market, including several new product launches that were introduced in our September sales convention and the upcoming launch of our new CBD product line.

We will also begin to beta test our new website and digital marketing efforts in preparation for a full market launch.

Now let me turn the call over to Joe to walk you through our financial results. Joe?


Joseph W. Baty, Nature's Sunshine Products, Inc. - CFO & Executive VP of Finance [4]


Thank you, Terrence, and good afternoon, everyone. Net sales in the third quarter of 2019 were $88.5 million compared to $88.8 million in the same quarter last year.

On a local currency basis, net sales increased 1.1% year-over-year or relatively flat as reported.

Unfavorable foreign currency exchange rate fluctuations impacted net sales by $1.3 million compared to the prior year.

Asia net sales declined 1% year-over-year to $33.7 million during the third quarter, but increased 1.8% in local currencies. On a local currency basis, the growth was driven by a 14.3% increase in Japan and a 16% increase in China, partially offset by an 11.3% decline in South Korea.

Net sales in Europe increased 12% year-over-year to $14.6 million or 13.7% growth in local currencies.

As Terrence noted, the net sales increase reflects continued growth in Central and Eastern Europe, including strong performance in Russia.

North American net sales in the third quarter declined 4% year-over-year to $34.2 million or a 3.9% decline on a local currency basis.

As anticipated, we continue to see lower recruiting rates that are not offsetting attrition in NSP Americas. We continue to focus on driving improved performance with new leadership and initiatives, including among others, recent and future new product launches.

Net sales for Latin America and Other decreased 1.7% year-over-year to $6 million or grew 0.2% on a local currency basis. The modest growth on a local currency basis reflects enhanced focus on these markets.

Gross margin increased 33 basis points to 74.3% compared to the year ago period. The gross margin increase was driven primarily by favorable changes in market mix, cost efficiencies and reserve for obsolete inventory recorded in the prior year.

Volume incentives as a percentage of net sales were 33.7% compared to 34.3% in the same period last year.

Changes in market mix can impact the percentage. Selling, general and administrative expenses were $31.2 million, down $0.5 million year-over-year. The decrease in SG&A is primarily due to savings from prior restructuring activities. As a percentage of net sales, SG&A expenses were 35.2% compared to 35.6% in the same period in 2018.

Excluding the impact of $0.4 million in restructuring expenses in the third quarter of 2019 and excluding $0.7 million of restructuring expenses and a $1.7 million gain on sale of property in the third quarter of 2018, SG&A expenses declined to 34.8% of net sales from 36.4% in the prior year period.

We reported operating income of $4.7 million or 5.3% of net sales compared to operating income of $3.5 million or 4% of net sales in the prior year period, which benefited from the $1.7 million gain on sale of property, partially offset by certain restructuring costs.

Excluding the previously mentioned unusual items related to restructuring in the prior year gain on sale, among others, we generated $5.1 million of operating income or 5.8% of net sales for the current quarter compared to $2.5 million or 2.8% of sales in the prior year period.

Adjusted EBITDA, as defined in our press release as net income from continuing operations before income taxes, depreciation, amortization and other income or loss adjusted to exclude share-based compensation and certain noted adjustments, was $8.3 million in the third quarter of 2019 as compared to $5.1 million in the third quarter of 2018. Net income attributable to common shareholders for the quarter was $1.3 million or $0.07 per diluted share as compared to $1.5 million or $0.08 per diluted share in the year ago period.

Adjusted net income attributable to common shareholders was $1.6 million or $0.08 per common share compared to adjusted net income of $1 million or $0.05 per common share in the prior year period. A reconciliation of adjusted net income to generally accepted accounting principles net income is provided in today's press release.

Turning to liquidity. We remain in a solid financial position with cash and cash equivalents at September 30 of $50.5 million with no long-term debt. For the first 9 months of 2019, we generated $5.5 million of cash from operations compared to generating $14.2 million in the comparable prior year period. The change in cash from operating activities on a year-over-year basis primarily reflects changes in working capital, specifically a year-to-date reduction in accrued liabilities and a planned increase in inventory. I would now like to turn the call back to the operator to facilitate Q&A.


Questions and Answers


Operator [1]


(Operator Instructions)

And we'll take our first question today from Steven Martin with Slater.


Steven L. Martin, Slater Capital Management, L.L.C. - Manager [2]


You've done a great job of getting the business fixed and poised for growth. Would you venture a guess as to when we're going to start to see some top line growth? And along with that, how do you expect in magnitude the launch of the CBD product to look in your first year?


Terrence O. Moorehead, Nature's Sunshine Products, Inc. - President, CEO & Director [3]


I'll start with CBD. There's a -- obviously, a lot of excitement around CBD in the market in general, but also given our practitioner-based business and the skill level that they have and the attention to detail that they put behind kind of product and therapeutic-driven products, there's a tremendous amount of excitement with them. Having said that, I wouldn't venture to say kind of where we'll land on that. But I will say that a significant portion of our distributors and practitioners are already kind of playing in this segment and are eager to take on our product.

With respect to top line growth, the -- as you can hear as I went through our 5 strategies, every single one of them is designed to start building a platform to make our company more attractive, more relevant, more powerful and to really get back to our core capabilities of being a leader when it comes to herbal supplements and botanicals.

And so again, I don't want to get into the timing of when we expect things to really start to click, but we're seeing tremendous growth in Russia, Poland, Central and Eastern Europe. We expect that strength to continue. Our business in Asia, despite the ding in Q3, our business in Korea is strong. And we continue to be very optimistic about China. So I think we feel very good about Asia. And then, of course, North America is the big nut that we are hammering away on, and our new Executive Vice President of North America, Eddie Silcock, who just joined us about 6 months ago, he's working very closely with the executive committee and his team in North America to lay the foundation to get that business back on track and really start to create an opportunity for us to drive growth in the marketplace. So I just kind of have to leave it at that for now. We're -- again, we're still early days. We've only been at this for about 6.5, 7 months, but again, I think early signs are quite good. And I think when you guys see the new rebranding, it's very exciting. The research on that is very positive. When you see what we're doing with CBD, it's a complete departure from what the company has done in the past. We've also -- one thing that I did not mention is that we've launched a new corporate foundation. It's called the Impact Foundation. We just recently launched that, had a very successful inaugural event which was in 5K walk. And I mention this only because, again, with both baby boomers but also millennials, people are looking for companies that don't just sell products that also stand for something and have a philosophical -- have a philanthropic bent to them. And that's always been important to our company. So having the Impact Foundation now a part of our DNA is just going to be more important going forward. So again, we're trying to do a lot to recraft and reposition the company for the future. And we are expecting and just hoping for good things to come. Does that answer your question?


Steven L. Martin, Slater Capital Management, L.L.C. - Manager [4]


All right. If you don't -- Yes, it does. If you don't mind, on the financial side, you really have done a great job repositioning the company, stabilizing, getting it ready for growth. You've got $50 million of cash. You've got healthy EBITDA, and your stock price is reasonably cheap.

At what point would you -- the Board consider using some of that cash to take either -- pay a dividend or buy back some stock? Or at a minimum amount of stock to consider offsetting some of the option creep in buying back the option shares?


Terrence O. Moorehead, Nature's Sunshine Products, Inc. - President, CEO & Director [5]


Sure. Sure. That's a good and reasonable question, probably one better suited for the Board of Directors. And obviously, those things are at their discretion. Right now, the management team is focused on driving growth and trying to invest in growth.

We have some significant investments that we'd like to make in digital, we have significant investments that we need to make in our brand and branding. So I don't want to preempt the board on those things. But again, we feel very good about our financial position. And Joe and the finance team and the operating committee have done a -- the executive committee have done a great job of putting us in a position where now we can have some real options. Is that fair?


Steven L. Martin, Slater Capital Management, L.L.C. - Manager [6]


Yes. It is.


Operator [7]


Thank our next question will be from Jurriaan Hofman with Robeco.


Jurriaan Hofman, Robeco Institutional Asset Management B.V. - Equity Analyst [8]


Could you give a little bit more color just on what happened in South Korea and also on the Chinese market? In China, you seem to be faring somewhat...


Terrence O. Moorehead, Nature's Sunshine Products, Inc. - President, CEO & Director [9]


Yes. In South Korea, they were -- last year, at this time, I believe, we had a major event, and so there was a spike in Q3 performance that we were going up against this year that will land in, I believe, Q4. So we've got an event in Q4. So it's just -- I think it's a timing issue from that standpoint. With respect to China, we continue to, I guess, kind of just focus on the fundamentals. We've got some very strong, very experienced leaders there who are adapting, I think, quite well to the changing environment on ground. And not the least of that is not only maintaining fundamentals in and around the recruiting, training and motivating of new distributors, but also in terms of consumer acquisition, we're seeing some, I think, good activity in that area. And so again, that's, I think, one of the things that's holding us afloat in China right now and allowing us to continue to enjoy some double-digit growth there.

I don't know if I missed anything, Joe, on that one. If you want to add any commentary.


Joseph W. Baty, Nature's Sunshine Products, Inc. - CFO & Executive VP of Finance [10]


No, I think Terrence did a nice job answering that. I think just back to the South Korea question to Terrence's point, just recommend that you look at that on a year-over-year basis. Then you'll see that maybe on a Q3-over-Q3, it's a little more about the timing. And in addition to that, from time to time, you have certain tactical go-to-market strategies you're trying to implement with certain of your distributors, and that will come into play on the timing of when those things happen as well.

But overall, we feel very confident on our Korea business moving forward.


Terrence O. Moorehead, Nature's Sunshine Products, Inc. - President, CEO & Director [11]


Yes. Fundamentals there are actually quite strong. And I feel good about the team there, what they're doing. This new initiative to change the experience through our kind of just totally redesigning our branches and the technology there are going to pay dividends for us going forward. It really is a -- it's a transformative experience for both the distributors as well as consumers on the ground there. So we're really feeling good about Korea.


Operator [12]


That will conclude today's question-and-answer session. I will now turn the conference over to Terrence Moorehead, CEO, for any additional or closing remarks.


Terrence O. Moorehead, Nature's Sunshine Products, Inc. - President, CEO & Director [13]


Okay. Just want to take a moment again to thank everybody for joining the call. Thank you for your ongoing support, and we look forward to updating you on our continued progress as we move forward with our global strategy.

Thanks again, and have a great day.


Joseph W. Baty, Nature's Sunshine Products, Inc. - CFO & Executive VP of Finance [14]


Thank you, everyone.


Operator [15]


That does conclude today's conference call. Thank you for your participation. You may now disconnect.